ArcaMax

How long do you think you’ll live? That’s not an idle question, since so much of your financial planning depends on your likely longevity. Of course, no one knows the future. But at least you can put the odds on your side.

The entire art of financial planning is to make your money last as long as you do! If you’re very wealthy, or die unexpectedly early, you’ll need an estate plan to distribute the balance to your heirs. But most people would just like the peace of mind that comes with knowing they won’t run out of money in their old age.

And that brings us back to the question of how old is “old age” in your specific situation. Answering that question gets even more complicated for couples trying to plan for retirement. They must jointly consider the probabilities of longevity: when to retire, when to claim Social Security and how to invest and withdraw retirement funds.

The American Academy of Actuaries and the Society of Actuaries have just relaunched their online longevity calculator, which can be found at www.longevityillustrator.org. It takes into account the latest mortality tables to give not just an “average” life expectancy, but the probabilities that you — or a couple — will live into their eighties or even 90s. And you might be surprised at the results.

The calculator is simple to use. Just enter information for an individual or a couple: the age(s), desired retirement age(s), whether you are a smoker and your general health (excellent, average, poor). Then with one click you’ll see the actuarial likelihood of living to a specific age. You can print out the enlightening graphics.

For example, let’s say “Susan” is 65 years old and hopes to retire this year. She’s working with a financial planner, who has given her several investment and withdrawal scenarios. But key to all her plans is her life expectancy. Susan has always thought she was “above average” in intelligence and in keeping fit! So, she might live much longer than average — and she wants to plan for that possibility.

The Actuaries Longevity Illustrator instantly gives her a simple graphic showing Susan has a 73% chance of living until age 85 — and a 53% chance of living until age 90! In fact, she has a 29% chance of living until age 95! (And a long shot 10% chance of making it to 100!)

Why should Susan accept a financial plan that is based on a general population “average” life expectancy for a 65-year-old woman — an additional 19.7 years? Based on that average, she should be dead at age 85. But in her case, the Illustrator shows she has a better than 50/50 shot at living to 90. And she doesn’t want to be broke in those last five years!

For couples, the calculations become even more complex. Let’s say Susan’s husband, Tom (a nonsmoker in excellent health), is also age 65 and is contemplating retirement this year. His life expectancy on the individual calculator is a bit shorter, since women tend to live longer than men.

But when you blend the probabilities of both living longer than average, the probabilities of longevity actually increase. As a couple, there is a 50% probability that BOTH will still be alive in 19 years, and a 10% probability that both will be alive in 28 years.

But the real planning challenge is that there is a 50% probability that either one of them (we don’t know which!) will be alive in 28 years — well into their 90s!

Suddenly, the issue of planning for longevity takes on a new challenge for a surviving spouse to have income in those later years. You can’t take a chance on a bear market wiping out half of your portfolio in the early years of retirement. You need to insure against the devastation of long-term care costs, which can destroy your plan.

This couple each needs to consider delaying Social Security until age 70, getting a much larger check (30% larger than if you started at age 62) — a check that will be inflation-adjusted every year. And they should run scenarios to maximize survivor benefits.

For younger people, the calculator helps with decisions about how much to save for retirement, and how to invest. Starting early with a realistic projection of longevity gives a greater certainty that you won’t run out of money before you run out of time.

The Longevity Illustrator at www.longevityillustrator.org won’t take the place of a good financial plan. But at least your plan will be built on firm ground — not the quicksand of averages. And that’s The Savage Truth.

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(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)

©2024 Terry Savage. Distributed by Tribune Content Agency, LLC.